Court: District Court, District of Columbia; October 24, 2018; Federal District Court
In late November and early December 2013, Chan and Wang conducted multiple cash transactions that were closely tracked by the government. Key activities included a $4,000 cash withdrawal from Wang's account on November 21 and a $6,000 withdrawal on December 2. On December 3, Chan deposited $10,000 into his personal account and transferred the same amount to a new Scottrade brokerage account, where he placed an order for $9,979.17 worth of Merrimack stock. Further transactions included two cash withdrawals totaling $13,000 from Wang's account and a $12,000 deposit into Chan's account on December 5 and 6, respectively, followed by a transfer of $12,000 to the Scottrade account and a subsequent stock purchase order for $12,006.10. During this period, Chan and his wife made significant purchases of Merrimack stock, totaling $272,966.44 between December 3 and December 11, 2013, including substantial purchases of $53,516.92, $58,343.06, and $124,492.47 on November 19, 21, and 26, respectively. On February 3, 2014, Chan ordered an additional $139,820.98 of Merrimack stock. Following the death of the 305th participant in the NAPOLI-1 trial, which occurred around February 13 or 14, 2014, Chan made further financial movements, including a $6,800 transfer to the Scottrade account and various cash withdrawals from Wang's accounts. On February 27, a $19,800 cash deposit was made into Chan's account, followed by a $13,000 transfer to his Scottrade account. During this time, Merrimack held an earnings call outlining the NAPOLI-1 study's design and potential outcomes, emphasizing the importance of the trial results for the drug's future development, including plans for a press release and publication of findings in the second quarter of 2014.
On February 28, Chan ordered $19,592.34 of Merrimack stock from his Scottrade account. Belanger received a complete dataset for the NAPOLI-1 trial on March 5, 2014, which was shared with the biometrics team, including Wang, for analysis. Between March 6 and March 24, Chan and Wang purchased a total of $515,999.11 of Merrimack stock from accounts other than Chan's Scottrade account. On April 4, Chan placed orders totaling $102,544.98 for Merrimack shares and continued purchasing on April 10 and 14. Notably, on April 15, Chan sold $145,666.79 of Alexion Pharmaceuticals stock before placing a large order for 33,400 Merrimack shares, which expired, followed by a canceled order for 34,610 shares the next morning. On April 17, Chan entered another order for 32,522 shares, which also expired.
On April 19, Belanger and Wang received an email granting access to the final NAPOLI-1 dataset, after which they completed a final analysis within an hour. On April 21, Merrimack CEO Mulroy announced a company-wide blackout period, emphasizing that discussing the blackout was material nonpublic information. Later that day, Chan executed his largest single order of Merrimack stock, purchasing 32,522 shares for $145,708.55. On April 25, Wang ordered additional Merrimack shares totaling $22,348.13. The following day, Belanger emailed Wang a draft press release regarding the positive NAPOLI-1 results, requesting her feedback, noting the release was nearly final and scheduled for public announcement on May 1 at 6 a.m.
On April 28, Chan and Linda Wang ordered $67,810.22 worth of Merrimack stock, contributing to a total purchase of $1,569,713.91 from November 19, 2013, to April 28, 2014. On May 1, 2014, Merrimack announced significant results from the NAPOLI-1 trial, indicating improved overall survival for participants in the experimental arm, and highlighted the need for better treatment options for pancreatic cancer. Following this announcement, Merrimack's stock price surged from $4.39 to $6.99, a 59% increase, with trading volume escalating from 1,047,388 to 30,804,948 shares.
On May 16, 2014, Merrimack's General Counsel, Jeffrey Munsie, informed select employees about a formal inquiry from the Financial Industry Regulatory Authority (FINRA) related to pre-announcement trading of Merrimack securities. Munsie requested details from these employees regarding their awareness of the trial results, with Wang stating he first learned of them on April 19, 2014. Additional communication on August 21, 2014, involved Munsie following up on the FINRA inquiry, which included Chan's name on a list provided to Merrimack. Wang confirmed on September 3 that he did not recognize anyone from the list.
On March 2, 2015, Chan sold $98,219.80 of Merrimack stock and transferred $98,427.26 to his personal account on March 24, subsequently writing a check for $84,143.38 to ‘Songjiang Wang’ labeled as ‘repayment.’ On July 28, 2015, Chan accepted a position as Director of Biostatistics at Akebia, which was conducting a Phase 2 study of the drug vadadustat, following the completion of a prior trial involving non-dialysis patients.
Akebia submitted its Form 10-Q Quarterly Report to the SEC on August 11, following Chan's acceptance of a job offer but prior to his start date. The report disclosed a higher incidence of serious adverse events (SAEs) in the vadadustat treatment group during a previous Phase 2 trial, while indicating that results from an ongoing Phase 2 trial in dialysis patients would be available in the third quarter of 2015. Positive results were anticipated to lead to the initiation of a Phase 3 program in 2016. Investor interest was piqued by the expected results, with JMP Securities highlighting the potential for these results to alleviate safety concerns. Morgan Stanley noted that prior trial SAEs had caused a significant drop in Akebia's stock, but future trial results could restore confidence in the drug's safety.
Chan's first day at Akebia was August 17, 2015, where his initial tasks involved the close-out of the 0011 study. A meeting was scheduled for August 19 to discuss topline results, emphasizing a tight timeline for data presentation to leadership. On August 19, Chan communicated his intention to work from home and participated in discussions regarding the safety data, which was noted to have minimal adverse events. He subsequently purchased Akebia stock on August 19 and again on August 21. Between these dates, Chan collaborated with his team to prepare the topline data for presentation to both the executive team and the public.
On August 24, Chan emailed Carriere and Hartman the study numbers for 0011, which were later used in Akebia's press release. Communication records indicate that Chan and Linda Wang had daily phone contact from August 16 to August 30, with Wang placing multiple stock orders totaling approximately $120,420.85 on August 24 and an additional $30,732.00 on August 26. Chan also communicated with Songjiang Wang, including several phone calls and texts on August 24. On August 28, Songjiang Wang purchased $21,007.95 of Akebia shares and executed options trades, followed by further stock purchases on August 31 and September 1. After Akebia's positive press release on September 8, which highlighted favorable study results and safety profiles, the stock price surged from $7.81 to $11.36, with trading volume jumping significantly. On November 6, Akebia's General Counsel informed select employees of a FINRA review related to the September announcement, identifying individuals with access to pre-announcement data. Chan responded to the inquiry by indicating he did not know any individuals listed, and shortly after, he texted Wang about her office presence.
FBI agents interviewed Chan and Wang in 2016 regarding their relationship and communications. Chan initially denied knowing Wang but later identified him as 'Sam Wang' and admitted to regular communication. Wang, when questioned, was uncertain about knowing anyone at Akebia but mentioned a possible connection to someone named 'Jason,' suspecting it might be Chan. The Second Superseding Indictment charged both Chan and Wang with conspiracy to commit securities fraud (Count One), alleging their conspiracy began in November 2013 and continued through September 2015, involving Merrimack and Akebia shares. To convict for conspiracy under 18 U.S.C. § 371, it must be shown that the defendants agreed to commit an unlawful act, participated voluntarily, and that an overt act was committed in furtherance of the conspiracy.
Counts Two and Three charged both defendants with securities fraud under 15 U.S.C. §§ 78j(b) and 78ff(a) and 17 C.F.R. § 240.10b-5, based on insider trading through a 'tipping' theory. This theory holds that a corporate insider (tipper) who shares confidential, material information with another person (tippee) can be liable if the tippee trades on that information. Count Two pertains to Chan's purchases of Merrimack stock in April 2014, based on information provided by Wang, while Count Three relates to Wang's purchases of Akebia stock between August and September 2015, based on information from Chan. Count Four charged Chan alone with securities fraud in August 2015 for using nonpublic information from Akebia.
Defendants’ motion for judgment of acquittal is based on two main arguments: a claim of prejudicial variance between the conspiracy alleged and that proven at trial, and insufficient evidence to support the verdict. Additionally, they pose several arguments under these categories. A prejudicial variance occurs when the evidence presented at trial differs from the allegations in the indictment.
A variance in the facts presented at trial compared to the indictment does not warrant acquittal unless it prejudices the defendants' substantial rights. As long as the statutory violation remains consistent with that alleged in the indictment, a conviction can stand despite factual discrepancies unless they result in unfair prejudice. Sufficient detail in the indictment is necessary to allow defendants to prepare a defense, avoid surprise, and assert double jeopardy.
In this case, defendants argue two variance theories: the scope of the conspiracy regarding Merrimack studies and the possibility of multiple conspiracies. The first theory claims that the indictment alleged Wang had material, nonpublic information about three Merrimack drug studies but that trial evidence only related to the most recent study, NAPOLI-1, with information not available until March 2014. Defendants assert this variance from the alleged start date of the conspiracy in November 2013 prejudiced them by allowing the introduction of damaging evidence regarding cash withdrawals that occurred between November 2013 and February 2014.
The indictment referenced three Merrimack studies but did not name them, while trial evidence clarified that the announcements related to specific drugs: MM-121, MM-302, and MM-398. Notably, there was no evidence presented that Wang was involved with MM-121 or MM-302, supporting the defendants' claim of variance between the indictment and the evidence.
Defendants' claim that the start date of the conspiracy changed is incorrect. They argue that Wang only obtained material, nonpublic information about MM-398 after April 19, 2014, but evidence from Belanger shows that Wang had access to this information as early as November 2013. Wang was part of a biometrics group that had live data from the MM-398 study and began structured cash transactions at that time. The government’s evidence regarding the conspiracy period aligns with the indictment, and thus the admission of evidence related to structured cash transactions was appropriate. Defendants contended that their defense relied on disproving Wang's possession of material information related to other studies, but failing to do so does not demonstrate prejudice against their case. The law permits a conviction based on any offense in a multi-offense conspiracy, as established in precedent cases. The indictment had adequately warned Defendants about the conspiracy's start date, allowing for proper preparation regarding the evidence presented. Variances between the indictment and trial evidence did not prejudice Defendants, as the government is not required to detail all evidence in the indictment. Lastly, Defendants' assertion of multiple conspiracies instead of a single one charged in the indictment requires further analysis.
The document evaluates whether evidence is adequate for a jury to find an agreement as charged in the indictment or to convict the defendants of related conspiracies. It references the case law that addresses the sufficiency of evidence and the implications of any variances between charged and proven conspiracies. The indictment specifically charged a conspiracy to commit securities fraud from November 2013 to September 2015, focusing on manipulative actions regarding Merrimack and Akebia stocks. The defendants argued that evidence indicated two separate conspiracies, one for each stock. However, the evidence was deemed sufficient to support a single conspiracy based on three factors: a common goal, overlap among participants, and interdependence of their actions. The agreement between the defendants involved sharing nonpublic information and trading securities, fulfilling the common goal requirement. Both defendants were critical in executing both aspects of the scheme, demonstrating overlap and interdependence. Even if two conspiracies were considered, evidence still supported convictions for both Merrimack and Akebia-related securities fraud. The jury's findings were backed by adequate evidence for each conspiracy charge.
The defendant raises concerns regarding potential juror confusion in cases involving alleged multiple conspiracies, fearing that jurors might wrongly attribute guilt based on evidence against co-defendants in separate conspiracies. Citing *United States v. Dellosantos*, the defendants argue that the government presented excessive evidence of unrelated crimes, leading to prejudicial "evidentiary spillover." However, unlike the Dellosantos case, where the evidence was not sufficiently tied to the defendants, the current case presents ample evidence against each defendant specific to their actions. Consequently, any variance indicating two conspiracies instead of one is deemed harmless.
The defendants also assert they would have sought to sever charges related to structured cash transactions had they understood the evidence would support multiple conspiracies. The court counters that the evidence sufficiently links these transactions to a single conspiracy. Even if two conspiracies existed, the structured cash evidence would still be admissible in a trial focused solely on the Akebia-based fraud due to its relevance to the defendants' financial relationships. Thus, the defendants fail to demonstrate the significant prejudice required for severance, and their argument is ultimately waived due to the lack of a pre-trial severance motion, as mandated by Federal Rule of Criminal Procedure 12(b)(3)(D).
Finally, even though the defendants challenge the sufficiency of evidence for additional counts, the court concludes that the evidence supports a conviction for the single conspiracy charged in Count One, and the claim of a prejudicial variance fails.
Defendants argue that there is insufficient evidence to establish that Wang possessed material, nonpublic information before Chan executed trades related to Akebia stock. For Count Three, while it is acknowledged that Chan had access to this information prior to Wang's transactions, Defendants assert that the government has not proven that Chan shared the information with Wang. Specifically, Chan admits to having the information on August 21, 2015, after receiving it via email, while Wang's first purchase occurred on August 28, 2015. Defendants claim this gap raises reasonable doubt regarding the communication of the information. Citing United States v. Larrabee, they argue that without proof of Chan providing the information, the misappropriation theory cannot stand. Larrabee emphasizes that circumstantial evidence is critical in establishing whether a tipper possessed material, nonpublic information, relying on factors such as the relationship between the parties, the timing of their interactions, and the nature of the trades. However, unlike the defendant in Larrabee, who contested his possession of the information, Chan concedes he had it, making Larrabee less applicable to this case.
The Larrabee factors provide a framework for assessing whether the government established that Wang, as the tippee, had material, nonpublic information concerning the 0011 study during his trades. Most factors support the conviction on Count Three, with the relationship between Chan (the tipper) and Wang being significant, as they shared a personal, financial, and professional connection similar to that in the Larrabee case. Evidence indicated that Chan attempted to hide this relationship during a FINRA inquiry. Although the timing of events differs from Larrabee—with a longer interval between Chan's access to information and Wang's trades—the timeline still suggests that Wang's substantial purchases of Akebia shares shortly after communicating with Chan provide strong circumstantial evidence of insider trading. Specifically, Wang initiated large investments just days after their conversation, coinciding with the upcoming press release about positive study results, reinforcing the notion that these trades were informed by material, nonpublic information.
Regarding Count Four, Chan argued insufficient evidence for his August 19 purchase of Akebia shares, claiming he only had access to material information after August 21. However, trial evidence, including an email received by Chan on August 19 indicating positive results, supported the jury's conclusion that he possessed such information prior to his purchase.
Chan argues that merely receiving an email does not prove possession of insider information. However, when combined with circumstantial evidence, such as the timing of his stock trades, it strongly infers that he did possess such information. Chan purchased $38,647.00 of Akebia shares shortly after receiving the email from Carriere, supporting the jury's conclusion that he viewed the email before trading. Evidence indicates he accessed his work email the following morning and subsequently made additional purchases. This supports the jury's guilty verdict on Count Four.
Regarding Count Two, defendants claim there is insufficient evidence that Wang had insider information about the NAPOLI-1 trial before March 5, 2014. However, evidence shows that Chan began purchasing Merrimack shares in August 2013 and that Wang likely possessed material nonpublic information starting in November 2013, which he shared with Chan. Chan's significant stock order on April 15, 2014, shortly after speaking with Wang, further indicates he acted on this information, supporting the jury's guilty verdict on Count Two.
The defendants also filed a motion for a new trial under Federal Rule of Criminal Procedure 33, arguing for acquittal on the Merrimack Counts and a new trial for the Akebia Counts. They suggest that evidence from the Merrimack trades may have prejudiced the jury's view of the Akebia counts. However, the court found no basis for acquittal on any counts, thus the argument for a new trial is also denied. Chan's motion highlights another point raised during the prosecution.
Chan argued that he accessed sufficient information from public sources and leveraged his expertise in the biotech industry to anticipate positive outcomes for the NAPOLI-1 and 0011 studies prior to the respective press releases from Merrimack and Akebia. His qualifications include a doctorate and extensive experience in biotech since 1996, alongside a dedicated interest in trading biotech stocks over the past fifteen years. Chan detailed his investment process, which involves understanding the science behind drugs, reviewing clinical data and planned studies, tracking company stock histories, and comparing drugs to benchmarks.
For Merrimack, Chan's research began after learning of Wang's involvement. He developed a positive view of MM-398 based on its previous performance and external consultations. He noted a publication indicating improved patient survival with MM-398, leading him to suspect that the drug was outperforming expectations when Merrimack announced a delay in data release.
Regarding Akebia, Chan analyzed safety data from the 0007 study and believed concerns were overstated. He began purchasing shares after accepting a job with Akebia in July 2015, feeling reassured by a 10-Q filing indicating plans for a Phase 3 study of vadadustat. His credibility was crucial for the jury's evaluation of his claims, but they found significant inconsistencies and gaps in his testimony, leading to a reasonable conclusion of his lack of credibility.
Defendants failed to demonstrate exceptional circumstances justifying court interference in the jury's credibility assessment. Even if Chan was credible in his independent evaluations of the drugs, the critical issue is whether the government proved he possessed material nonpublic information at the time of his trades. Material information is defined as that which would significantly alter a reasonable investor's assessment of the total mix of available information. Despite Chan's expertise and the use of public data to make predictions on MM-398 and vadadustat, evidence suggests he traded based on material nonpublic information. Specifically, he traded Akebia shares after receiving a confirming email regarding a positive safety result and was aware of impending public disclosure. Similarly, regarding Merrimack, Chan purchased shares after data confirmed significant findings related to increased lifespan and was informed of the public announcement timing. This information was deemed material, as evidenced by subsequent increases in share price and trading volume following the relevant disclosures. The defense did not provide a viable rationale for a new trial, and the court found no miscarriage of justice or overwhelming evidence against the verdict. Consequently, the Defendants' Joint Motion for Judgment of Acquittal and for a New Trial, as well as the Motion for Judgment of Acquittal, were denied. The court also noted two cash withdrawals of $6,000 from Wang's account and previous stock purchase orders by Chan, emphasizing the importance of the timing of these trades to the issue of guilt or innocence.
Orders to purchase stock referenced by the court are exclusively those that were executed, unless specified as cancelled or expired. Chan placed trade orders using TD Ameritrade accounts, while Linda Wang used a separate Scottrade account. An email sent by Akebia on August 14 instituted a trading restriction for employees and directors due to an impending database lock related to a clinical study, indicating the information was confidential. There is no evidence that Chan opened or viewed this email, despite testimony suggesting it was in his inbox. The document clarifies that references to Chan's and Wang's statements pertain exclusively to each individual. The Second Superseding Indictment is the only indictment considered. The defendants contended that no evidence regarding a December 13, 2013, announcement was presented at trial, although such an announcement was admitted as evidence. The government asserts that Wang had access to material, nonpublic information as early as July 2013, citing a July 18 email from Merrimack’s General Counsel that indicated a material information blackout for select employees, including Wang. However, this email does not confirm that Wang actually possessed such information; it was intended to preempt potential violations of securities laws. The court notes that the defendants did not request a multiple conspiracy instruction nor object to the jury instructions, and their challenges regarding the sufficiency of evidence for Count One have been addressed in prior discussions on the conspiracy charge.
Defendants argue that the evidence only indicates violations of corporate insider trading policies, not actual insider trading laws. The court affirmed this legal stance to the jury during the trial. However, the evidence presented is deemed sufficient to demonstrate violations of insider trading laws. The government contests the timeline regarding when Chan acquired material, nonpublic information about vadadustat, asserting that the specific date is not crucial for Count Three. The case against Chan and Wang is based on the "classical theory" of insider trading, which holds that liability arises when an insider breaches a fiduciary duty to shareholders, contrasting with the "misappropriation theory" that focuses on breaching a duty to the source of the information. This distinction is supported by the First Circuit's explanation in SEC v. Rocklage.
